A tax on financial transactions was recently proposed in the E.U. Parliament as a way to generate significant revenues. This article empirically shows that such a transaction tax would cripple modern securities markets. Specifically, the article demonstrates how a transaction tax of as little as...

This article compares the performance of systematic and discretionary hedge funds. In systematic funds, most trades are originated and executed by computer programs written for that purpose. In discretionary funds, human traders make decisions when to buy and sell which financial securities. The...

This chapter examines high-frequency trading (HFT), including core groups of strategies and resulting impacts. Using order-by-order market data analysis, the chapter shows that much of what is often construed to be useless noise of order cancellations actually represents meaningful order...

In the classic mean-variance portfolio theory as proposed by Harry Markowitz, the weights of the optimized portfolios are directly proportional to the inverse of the asset correlation matrix. However, most of contemporary portfolio optimization research focuses on optimizing the correlation...

We derive the economic costs of latency induced by computer technology in trading. We show that the costs of latency are negligible in their expected value, but instead manifest themselves in increased risk to investors. We also show that our theoretical predictions firmly hold when tested on...

In this article, the author presents a model of distributional properties of returns on financial instruments tied to ETFs via high-frequency statistical arbitrage. As the author's model shows, the securities subject to an ETF arbitrage exhibit a well-defined behavior, largely dependent on the...

The current research assesses the risks commonly attributed to the presence of HFT in the context of different market structures deployed by the U.S. exchanges. In particular, we find that, by design, the so-called “normal” exchanges have the lowest market quality, including the highest...

Several exchanges in futures and options deploy pro-rata matching. The executed size of limit orders in pro-rata markets is never certain, unlike in price-time priority matching systems. This article derives the optimal size of limit orders in pro-rata markets given the trader's desired...

This research investigates the short-term nature of movements in price data. The key finding of the study is that asset returns do not evolve at the Gaussian increments commonly assumed by continuous pricing models. Instead, prices exhibit strong autocorrelation, often resulting in predictable...